Firms Look Beyond Hospitals For Health Care Deals

Drawn by the potential for recession-resilient investment, buyout firms have set their sights on companies that administer health care to patients in their homes or other sites outside of hospitals.

Of course, heightened interest begets increased competition, which in turn begets higher purchase prices. Jack Draughon, head of the health care team at LBO shop Arcapita Inc., said he’s noticed more buyout firms active in the sector and estimated prices have increased by about two turns of EBITDA since 2003. Arcapita benefitted in March when it agreed to sell TLC Health Care Services, a Lake Success, N.Y.-based home health care provider it owned since February 2005, to strategic buyer Amedisys for $395 million.

Regardless of purchase price multiples, buyout shops are nonetheless attracted to the sector, which figures to expand significantly as the nation’s population ages. Baby boomers, a cohort that accounts for 28 percent of the United States population, are due to turn 65 between 2010 and 2020. As they get older, they will undoubtedly increase the demand for health care.

The Blackstone Group put its money in the industry last month, agreeing to acquire Apria Healthcare Group, a home health care services provider, for $1.6 billion. The deal was illustrative in a number of ways: It was Blackstone Group’s first acquisition in this sector and the firm’s first solo control-stake play this year. The deal was also the largest health care buyout in 2008 and one of the largest LBOs since the credit crunch settled in.

The Blackstone Group is hardly alone. In May, MBF Healthcare Partners and Goldman Sachs Urban Investments bought OMNI Home Care. In the same month, Lindsay Goldberg invested $75 million in Ambulatory Services of America, a company that provides health care services outside of hospitals. Paine & Partners in March sold Byram Healthcare Inc., a company that supplies home health care companies with medical supplies, to OPG Groep N.V., a Dutch pharmaceutical company, for $132 million. And in February, MBF Healthcare Partners bought Critical Homecare Solutions from Kohlberg & Co. for $420 million.

One reason the sector may be attracting interest is because home health care companies are struggling with Medicare cutbacks, which essentially means they can be bought at a discount. About a third of Apria Healthcare’s $2 billion projected revenue for 2008, for example, will be from Medicare, according to the Los Angeles Times. The company warned in May that Medicare reimbursement shortfalls for certain respiratory drugs would cut 2008 revenue by $12 million more than the company had estimated. Still, the combination of a beaten-down stock and prospects for long-term, demographic-induced upswing, attracted Blackstone Group. (The firm declined to comment because the take-private hasn’t yet closed.)

To be sure, there are others not as enthusiastic about the sector. “We at Paine & Partners are being more conservative in health care and are spending less time on the industry than we have in the past,” said Dexter Paine, the firm’s founder, who has been investing in health care since the late 1980s.

Paine & Partners sold Byram Healthcare in part because of impending reimbursement changes, as well as uncertainty over how the next administration will address the nation’s health care crisis. “I don’t know whether that’s a plus or minus,” Paine said of the uncertainty. “But it makes for a complex environment.”

Firms betting on the long-term success of home health care see several favorable attributes for patients and investors. As health care costs increase, more people are choosing cheaper alternatives such as home health care or seeking care at clinics outside of hospitals. As it turns out, these alternatives are also cheaper for Medicare, Medicaid and HMOs, said Turner Bredrup, managing director and head of health care at Harris Williams, a Richmond, Va.-based sell-side advisory boutique. “There’s a belief—and I believe it’s a sound belief—that increasingly care will be taken to the home and only the sickest will be cared for in hospitals or nursing homes,” he said.

That’s just fine with patients, who have demonstrated that they prefer to avoid the hassle of hospitals as often as possible, Arcapita’s Draughon said. “People just don’t like dealing with it,” he said.

Moreover, home health care companies are less capital-intensive than hospitals and require less physical infrastructure, Bredrup said. Also, thanks to technological innovations, formerly difficult procedures such as colonoscopies and kidney dialysis can now be performed at clinics or even in the home.

Loan issuance for mid-market health care deals remains strong in an otherwise flagging environment, reaching $3 billion in the first quarter of 2008. That’s a 23 percent increase from the first quarter of 2007, according to Reuters Loan Pricing Corp.

“In the coming months, the health care sector may continue to be a refuge for investors given its resilience to the overall economic downturn relative to other industries,” according to a recent Reuters LPC analysis of the industry.